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NEW YORK INST. OF DIETETICS, INC. v. RILEY

June 9, 1997

NEW YORK INSTITUTE OF DIETETICS, INC., d/b/a NEW YORK FOOD AND HOTEL MANAGEMENT SCHOOL, Plaintiff,
v.
RICHARD RILEY, Secretary of the UNITED STATES DEPARTMENT OF EDUCATION, in his official capacity, Defendant.



The opinion of the court was delivered by: COTE

 DENISE COTE, District Judge:

 Plaintiff New York Food and Hotel Management School ("New York Food") operates a private, post-secondary vocational school offering courses in cooking and restaurant and hotel management. It seeks a declaratory judgment that the Department of Education ("Department"), in determining plaintiff's financial responsibility to participate in programs under Title IV of the Higher Education Act of 1965 ("Title IV"), 20 U.S.C. § 1070, et seq., may not consider a liability owed by an affiliated entity to the Department. The Department has moved for summary judgment. For the reasons stated below, the Department's motion is granted.

 Plaintiff commenced this action on February 28, 1996, by filing a Complaint *fn1" and bringing an Order to Show Cause for a preliminary injunction and, requesting, inter alia, a Temporary Restraining Order("TRO"). This Court issued a TRO that same day which enjoined the Department from, inter alia, taking action that would make the plaintiff ineligible to participate in federal student financial assistance programs authorized by Title IV or that would impose on the owners of plaintiff, as a condition to provisional certification of the plaintiff for participation in a Title IV program, the requirement that they repay an obligation for the debts of a related entity, County Schools, Inc. ("CSI"), debts that arose from CSI's own participation in Title IV programs.

 On March 8, 1996, the Government filed a motion for summary judgment. On August 7, 1996, the parties agreed and the Court ordered that the decision of the Department on the application for plaintiff's recertification would be remanded to the Department for supplementation of the Administrative Record and reconsideration, and that pending such decision the TRO would remain in effect. On October 17, 1996, the Department issued a decision following the remand ("October 17 Decision"). On October 29, 1996, the Court vacated the TRO. Following the October 17 Decision, the Government renewed its motion for summary judgment, which is now before the Court.

 FACTUAL BACKGROUND

 The following facts except where noted are undisputed. Plaintiff is owned by Joseph M. Monaco, Sr. (the "father") and Domenic C. Monaco (the "uncle"). Joseph S. Monaco, Jr. (the "son"), is the director and vice-president of plaintiff (collectively, the "Monacos"). Plaintiff has participated in Title IV programs pursuant to a Program Participation Agreement ("PPA") dated September 1, 1991. The father and uncle were previous owners of CSI, another private, post-secondary vocational school located in Bridgeport, Connecticut. Beginning in the mid-1970s and up to the time it went into bankruptcy, CSI participated in programs pursuant to Title IV. Although CSI is not a party in this litigation, because of the significance both sides place on plaintiff's historical affiliation with CSI, and for reasons that will become evident below, a brief discussion of CSI-related activity leading to its demise is necessary.

 A. Department Action Against CSI

 In April 1991, the Department of Education's Regional Inspector General for Audit (the "auditor") issued a "Final Audit Report" for the period July 1, 1988 through June 30, 1989, concerning CSI's administration of Title IV Student Financial Assistance ("SFA") programs. The auditor made two findings: (1) CSI "disbursed an estimated $ 18 million in SFA funds for students enrolled in an ineligible tractor trailer course," and (2) CSI "did not establish adequate internal controls to ensure accurate, fair and equitable refunds and that refunds totalling $ 2.6 million were not made timely by" CSI. According to the auditor, the tractor trailer course "failed to meet the course length requirements promulgated in Federal regulations and, therefore, did not qualify for participation in the SFA programs." The auditor thus recommended that the Department

 Thus, the auditor's sole "hard" refund recommendation concerns funds "totalling $ 6,170,484 which were disbursed for students enrolled in the ineligible Tractor Trailer course during the 12-month period needed [sic] June 30, 1989." The auditor further recommended that CSI "provide an accounting" of all such SFA funds disbursed since July 1, 1986, which funds CSI estimated "could exceed $ 18 million."

 With respect to the auditor's second finding, the auditor found that CSI was not "financially responsible" under the regulations because it failed to meet its obligation to make timely and accurate refunds to lenders for students who withdrew from the school, and for charging such students excessive registration fees. It recommended, among other things, that CSI

 
identify all students who withdrew from school since July 1, 1986 and compute the amounts of Title IV student financial assistance that should be refunded to [the Department] or the respective lenders.

 According to the auditor, CSI "agreed with the untimely refund issue." The Department issued a final program determination letter on August 28, 1991 (the "August 28, 1991 FPDL") endorsing the auditor's findings and recommendations. CSI filed an administrative appeal of the Department's determinations in October 1991.

 CSI's troubles, however, went further. In June 1991, the Department notified CSI that its "cohort default rates" ("CDRs") for 1987, 1988 and 1989 were equal to or greater than 35 percent, thus rendering CSI ineligible to participate in the federal Guaranteed Student Loan ("GSL") programs. *fn2" The Department found the following CDRs: 51.9% for 1987; 37.2% for 1988; and 47.6% for 1989. CSI was also notified of its right to appeal its loss of eligibility, which it did, challenging the accuracy of the 1988 and 1989 CDRs.

 According to plaintiff, the CDRs were made public, causing several banks to refuse to process federal funds already committed to CSI; it was this "severe interruption in cash-flow [that] created the insolvency." On September 12, 1991, CSI filed a voluntary bankruptcy petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. The CDR appeal was denied by the Department on December 3, 1991, and CSI was thereupon informed that it was no longer eligible to participate in the GSL programs effective upon receipt of the notice. On December 10, 1991, the Department changed CSI's method of funding from "advance payment" to "reimbursement" status. The former allows a school to have an account with the federal government that it may access simultaneously with providing educational instruction to students. Under reimbursement status, however, the school must first spend its own money and then apply to the government for reimbursement. The Department explained that this action was taken based on the August 28, 1991 FPDL, the December 3, 1991 denial of the CDR appeal, and CSI's

 
failure to pay refunds on behalf of students . . . . Institutional officials and representatives [from CSI] have admitted that [CSI] owes approximately $ 1 million in refunds for the period immediately prior to filing a petition in bankruptcy . . . .
 
this [letter] if [sic] formal notification that CSI is distributing a portion of funds previously held in escrow in accordance with the appropriate administrative priorities established under the Federal Bankruptcy laws of the United States.

 On December 17, 1991, the Department issued an "emergency action letter," which barred CSI from "initiating commitments of Title IV" program funds, using its own funds or federal funds on hand to make Title IV grants or loans, or releasing to a student the proceeds of a GSL program loan and return such loan proceeds to lenders. The Department justified its action, among other reasons, because "CSI has failed to refund institutional charges of approximately $ 2 million owed to GSL Program lenders and directly to" the Department.

 B. Debarment Actions

 On May 10, 1993, the Department issued a "Notice of Proposed Government-wide Debarment From Federal Nonprocurement Transactions" (the "Debarment Notice") to each of the Monacos. The Debarment Notice cited and incorporated by reference the emergency action letter, which charged CSI with failure to "refund institutional charges of approximately $ 2 million," and recited other alleged violations on the part of CSI. The Debarment Notices made no reference to the $ 18 million issue. The Debarment Notice further warned the Monacos of the consequences of debarment: ineligibility to receive federal financial and nonfinancial assistance or benefits from any federal agency under nonprocurement programs and activities, and inability to act as a principal on behalf of any person in connection with a covered transaction. During the administrative debarment proceedings, the Department stated that its reasons for seeking debarment were based

 
on the failure of CSI to make approximately one million dollars in refunds owed by CSI to hundreds of students who withdrew from CSI and who had received Federal Family Education Loan ("FFEL") Program loans.

 The administrative debarment proceedings were suspended by joint agreement of the parties in January 1994. According to the parties' "Joint Motion to Suspend Schedule,"

 
serious negotiations are currently underway to withdraw the three Debarment Notices. The Monacos and [the Department's Office of Compliance and Enforcement Division] have reached an agreement on the guidelines of such a withdrawal and the parties are currently in the process of drafting a written agreement.

 The parties settled the debarment actions in August 1995.

 C. Settlement Agreements

 The Administrative Settlement Agreement with respect to each of the Monacos (the "Settlement Agreements") provides, in relevant part, as follows:

 
By virtue of this agreement to be prohibited from participating [in any programs under Title IV, each of the Monacos] will not be an officer, director, owner, partner, key employee or other person with management or supervisory responsibilities within any corporation, partnership, sole proprietorship, or any other legal entity participating in any of the student financial assistance programs authorized by Title IV . . . .

 However, with respect to the son, the Settlement Agreement provided that

 
This Agreement does not prohibit Joseph S. Monaco from continuing to serve as the Vice-President and Director of the [plaintiff], providing that the following safe harbor provisions are all satisfied.

 The "safe harbor" provisions were a limit in salary, benefits and other sources of compensation during the agreement's term. The father and uncle were not prohibited "from continuing to own and serve as a member of the Board and as a shareholder of [plaintiff]," providing compliance with analogous safe harbor provisions. Neither the father nor the uncle were permitted any "management or supervisory responsibilities or substantive control over [plaintiff's] administration of any Title IV" program. The Settlement Agreements expressly provided that

 
the parties have entered into this Agreement for the sole purpose of resolving the Department's debarment action without further cost or expense. No other consequence is intended by the parties and no other interpretation of the purpose or effect of this Agreement shall be implied.

 The Settlement Agreements were made contingent on certain conditions: (1) each of the Monacos become "jointly and severally liable" for $ 200,000.00, pursuant to a Repayment Agreement also executed with the Settlement Agreements; (2) plaintiff agreed to guarantee the payment terms set forth in said Repayment Agreement; (3) plaintiff entered into an Institutional Participation Agreement Supplement ("Supplement Agreement") with the Department. Finally, the Monacos agreed "not to expand the participation of [plaintiff] . . . in any of the Title IV programs." The Department reserved the following rights:

 
Nothing herein shall be construed as waiving, compromising, restricting, or settling any cause the Department may have to impose a subsequent debarment action against [the Monacos] for any activities other than those involving [CSI]. The Department retains the right to bring a debarment action . . . should [the Monacos] be convicted of any criminal action arising out of [their] involvement with [CSI].

 (Hereinafter "Paragraph 11".)

 The Supplement Agreement provides, in relevant part:

 
the parties expressly recognize that nothing contained in this [Supplement Agreement] is intended to limit, in any way, the Department's right to pursue, either at this time or at any time in the future any administrative claim, audit claim, or fine, limitation, suspension, or termination action against [plaintiff] for its failure to perform its obligations arising under the Title IV Programs, or take other actions authorized by law . . . .
 
The Department does not waive compliance by [plaintiff] with any Federal or state law or regulation, past, present, or future, applicable to [plaintiff's] administration of the Title IV programs; nor does this [Supplement Agreement] restrict any remedy otherwise ...

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